The shift from rules-based to principles-based companies

Kenny MacIver – October 2014

A new generation of CXOs is rethinking how their organizations do business, says Lynda Gratton – broadening the scope for both business and social innovation.

Lynda Gratton has been studying the behavior of corporations for more than three decades. But what she has observed in the past few years has surprised even her. Under the influence of megatrends such as globalization, hyperconnectivity and worldwide financial instability, the professor of management practice at the London Business School has witnessed the erosion of rules-based organizational models and the rise of companies driven by principles.

“Certainly with corporations 30 years ago, it was all about the rules. What rules should an organization have, how should they work? But that’s beginning to change with a new generation of CEOs who want to make a difference,” says Gratton.

One standout example for her is Anglo-Dutch consumer goods company Unilever and its CEO Paul Polman. “He’s absolutely clear that the organization needs rules, but it is also very much principles-based. And what you see is people like Polman creating a narrative that more and more leaders want to join in as they talk about what they do to make a difference to the world.”

How that works in practice will certainly ring true for many CIOs at more progressive companies. Being led by a core set of social and business values has a direct effect on the way an organization is run, says Gratton. A senior manager at a principles-based company may be set the challenge of reducing their business unit’s carbon footprint by 50%. That can seem worthy but nebulous until it’s made clear that the agenda is being driven from the top of the organization and the manager’s next annual bonus is tied to reaching the target. At that point, good intentions tend to turn into action.

Ultimately, that means being principles-based can require a major realignment of the way you do business and get work done, she highlights. For example, a commitment to cut the carbon footprint of a company might involve programs to reduce journeys to the office and encourage more home working, the sanctioning of fewer international meetings and the support of more online collaboration. “It comes down to the level of asking, ‘Do we have to redesign work, do we have to redesign our offices?’” says Gratton, who is also founder of the Hot Spots Movement, a research and consulting team based in London’s stately Somerset House that helps organizations derive business value from academic insights.From values to innovation

The focus on principles is not wholly altruistic, of course — it is driven, in many cases, by the need to attract the raw talent that fuels corporate innovation. Gratton argues that many young professionals increasingly expect the companies they join to demonstrate sound credentials for business and social responsibility.

As she explains: “Globalization means you can assume somebody, somewhere around the world is going to be able to make what you can make faster and cheaper. So in high-cost societies that increasingly means value can only be created through innovation. And that takes an enormous focus on human assets — investment in both individuals and the organizational structures and technologies that get people to work together seamlessly.”

The role of digital technology as a catalyst for collaborative creativity can’t be understated, she says. “What I’ve seen in the past couple of years are the most extraordinary examples of technology building communities and those communities innovating. And if you were to ask me, ‘Where do you see the future of technology and the human interface?’ I think it’s in how you build innovation, it’s around the way you get crowds and groups to work together, both within an organization and outside.”

• Lynda Gratton’s The Key: How Corporations Succeed by Solving the World’s Toughest Problems is out now.

Professor of management practice at London Business School, head of the Future of Work Research Consortium and best-selling business author, Lynda Gratton focuses on people-centric strategies for transforming companies.

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